Accountants guilty of ignoring material 'natural capital' risks

Accountants guilty of ignoring material 'natural capital' risks

Almost half of firms regard their relationship with so-called natural capital as a "material issue" for their business, but reporting on environmental impacts and risks remains immature and patchy.

That is the conclusion of a major new report from the Association of Chartered Certified Accountants (ACCA), consultancy giant KPMG and NGO Fauna & Flora International, which finds that the concept of natural capital -- defined as "the stock of capital derived from natural resources such as biological diversity, ecosystems and the services they provide" -- is gaining traction in many boardrooms.

The report, Is natural capital a material issue?, surveyed more than 200 accountants at large firms and carried out in-depth interviews with several leading chief financial officers.

It found that 60 percent of respondents acknowledged that the services provided by the natural world were "important" to their business, while 49 percent identified natural capital as a "material issue" for their business and linked it directly to "operational, regulatory, reputational and financial risks."

However, the report also found that while growing numbers of businesses operating in sectors with relatively high environmental impacts are now providing "substantial detail" on their natural capital impacts and risks, the majority of public disclosures on the issue are "too limited to provide insights into risk management."

Moreover, a narrow majority of firms still do not regard natural capital issues as material, despite the fact universal services such as clean air, water and soil are critical to every organization's supply chains and long-term risk profiles.

The report also highlighted how a number of barriers make it difficult for accountants to include natural capital metrics in corporate reports, including the absence of standardized accounting principles for measuring environmental services and impacts and a lack of clarity surrounding the business case for natural capital reporting.

However, the report noted that there is a growing trend for leading companies to report on natural capital issues.

"Specific parts of natural capital are increasingly being recognized as critical and material business issues," said report author Dr. Stephanie Hime of KPMG's climate change and sustainability practice. "This report aims to bring a new audience into the debate by focusing attention on what the accountancy profession can do to mitigate these risks."

Rachel Jackson, head of sustainability at ACCA, urged accountancy bodies to "make their members aware of the need to account for natural capital within the company annual reports and accounts, as well as sustainability reports in order to avoid failures when anticipating future risk and their associated costs to business."

The past year has seen several leading firms pioneer natural capital reporting initiatives in an attempt to put a financial value on their natural world impacts and the environmental services they rely on. Most notably, sportswear giant Puma has touted the world's first Environmental Profit and Loss report, while several food and drink giants are investigating how water stress and soil erosion could undermine their business models.

Moreover, businesses are likely to face growing regulatory pressure to account for their natural capital impacts. The Department for Environment Food and Rural Affairs is undertaking work to develop a more standardised approach to measuring environmental impacts, while Chancellor George Osborne has commissioned a report to look at how natural capital could be incorporated into national economic indicators.

In addition, from next year all listed companies in the U.K. will face a legal requirement to report annually on their carbon emissions, a move that some green groups hope will act as a forerunner for further legislation mandating firms to report on environmental issues.